Global sanctions – compliance and enforcement trends

October 2017 | FEATURE | GLOBAL TRADE

Financier Worldwide Magazine

October 2017 Issue

Sanctions are an essential and unavoidable facet of the modern global economy. For firms in the financial services sector in particular, navigating the shifting regulatory landscape can be a difficult task. With third parties, clients and staff all potential sources of non-compliance, organisations must remain vigilant at all times.

The cost of failing to comply can be catastrophic, both financially and in terms of reputation. Should a company find itself doing business with war criminals, rogue states or terrorists, for example, the cost of a sanctions breach can be substantial. The same can be said if an organisation is found to have done insufficient due diligence on its clients or customers. Entities in breach of US legislation may find the cost of non-compliance particularly high. According to Resource Center, in 2016 there were nine cases of US sanctions breaches, which resulted in fines of more than $21.6m.

In July, ExxonMobil was fined $2m by the US Treasury for violating sanctions that the Obama administration imposed on Russian entities in 2014 following the annexation of Crimea. According to the Treasury, Exxon demonstrated “reckless disregard” in violating the sanctions. The Treasury also noted that the company’s “senior-most executives” were aware of the sanctions when two of its subsidiaries signed deals with Russian oil magnate Igor Sechin who was on a US blacklist that barred Americans from doing business with him.

Sanctions enforcement is also changing. In recent years, we have seen unprecedented levels of cooperation between the US and EU, particularly with respect to Russia and its incursions into Ukraine. Geopolitical shakeups are having an important impact. The Office of Foreign Assets Control (OFAC), under the Trump administration, is sending mixed messages. Brexit is also likely to mean big changes for EU and UK sanctions programmes in the coming years. In addition, regulators are adopting a tougher stance on sanctions compliance.

Increasing enforcement activity and changing policies and procedures make it imperative for companies to stay up-to-date with shifting requirements. “Given the rapidly changing sanctions landscape, it has become even more critical than ever that organisations stay abreast – and even ahead – of sanctions changes,” says Renee Latour, a shareholder at Greenberg Traurig, LLP. “Easily one of the biggest challenges for businesses in terms of sanctions compliance is keeping up with the speed at which sanctions are announced and become effective. Sanctions are regularly announced with little to no advance notice and are immediately effective. As a result, the implications for businesses – particularly international corporations which may not be actively following US sanctions developments – may be caught off guard and struggle to adapt compliance programmes to comply with the changing sanctions.”

Given the volatile nature of the current geopolitical landscape, sanctions enforcement can move very quickly. US regulatory bodies have aggressively targeted non-US companies, points out Wendy Wysong, a partner at Clifford Chance. “In the past year we have seen settlements, assets seizures, extraditions, sanctions designations and other measures to enforce US sanctions laws overseas. The US Commerce Department’s Entity List is a perfect example of a tool that can be used to compel non-US companies to submit to US jurisdiction, or risk being cut off from US-origin goods entirely. In the UK, the Office of Financial Sanctions Implementation (OFSI) was recently given the power to impose civil penalties for UK sanctions violations. This is a game changer.”

Compliance programmes should be tailored to an organisation’s culture. They should consider the products or services the company offers, as well as the jurisdictions in which it operates.

From April 2017, the OFSI has been able to use new powers to impose penalties for serious financial sanctions breaches. These penalties can be up to £1m or 50 percent of the breach, whichever is higher. This is one of a series of measures in the Policing and Crime Act which will strengthen the government’s response to financial sanctions breaches. The penalty powers apply to offences committed after 1 April 2017. In 2016, just over 100 suspected breaches were reported to OFSI, 95 of which were actual breaches, totalling around £75m. Rena Lalgie, Head of OFSI, said “We will continue to provide information and guidance to business, industry, the public and charitable sectors to facilitate compliance with financial sanctions. However, we will issue penalties for serious breaches and we won’t hesitate in referring the most serious cases to law enforcement agencies.”

One of the most helpful measures regulatory bodies could put in place would be to increase the level of clarity around compliance obligations. Clear and concise guidance is needed from bodies such as the OFSI in the UK, but it is often described as ambiguous at best. In areas such as jurisdictions and due diligence, regulators must do better, particularly as enforcement appetites continue to grow and sanctions and monetary penalties become harsher. OFAC in the US, for example, arguably offers organisations better access and provides clearer guidance.

Russia

In recent years, there has been considerable sanctions activity focused on Russia. Collaboration between jurisdictions has been striking. Multilateral sanctions have been enforced against Russia for its activity in the Crimea region of Ukraine and the country’s alleged interference with the 2016 US presidential election.

New sanctions targeting Russia, agreed by the US Congress in July, will impact companies doing business with Russian military or intelligence agencies, companies involved in Russian offshore oil projects and those participating in oil or gas pipeline construction within Russia. Furthermore, the sanctions target a wide range of industries – a further blow to the Russian economy, which is still recovering from the sanctions imposed in 2014. Though tough sanctions against Russia are not unusual, the latest round may mark the end of the US-European unilateral approach to enforcement, in light of the potential knock-on effect for European organisations. While the sanctions ostensibly target Russian-financed offshore oil projects and oil & gas pipeline construction, European nations and businesses could also suffer. The German foreign ministry, for example, suggested that the sanctions enforced by US Congress may be part of a US business plot to promote liquefied natural gas exports to Europe in the near future.

“The robustness of Western sanctions on Russia is clearly the main trend: 12 months ago, EU enthusiasm for these measures appeared questionable, EU internal in-fighting about the wisdom of these sanctions had become the norm and the election of president Trump looked likely to usher in a warmer US/Russia relationship,” says Miriam González, a partner at Dechert LLP. “Twelve months later the EU has resolutely renewed all its measures and in the US, Congress has cornered the president into signing a measure that not only codifies but also strengthens US measures against Russia in response to perceived election influence. The new US Act has caused concerns in Europe along the way, threatening secondary sanctions against EU businesses, and abandoning previous coordination of US and EU measures regarding Russia. This in itself is likely to mark the beginning of an upcoming trend: the possible lack of coordination between the US and the EU on further sanctions, breaching years of joint efforts and closely coordinated work.”

For organisations, achieving ongoing compliance can be difficult. Utilising external experts and implementing a robust sanctions policy are just two of the measures companies should take. For Ms Wysong, there is no excuse for a lack of preparation. “We are past the point where an international company can claim ignorance of sanctions. When it comes to US sanctions, anything involving US dollars or banks, US persons or US-origin goods must comply with the law, no matter where the activity takes place. At a minimum, international companies should have an internal or external sanctions specialist review risky transactions and provide updates on the law. Most law firms would be glad to provide training for their clients’ employees. Sophisticated companies should have a detailed sanctions policy and procedures supported by technology with up-to-date sanctions data from a reputable vendor,” she says.

Consulting with an external sanctions expert counsel is another way to ensure that a business stays aware of sanctions developments, says Ms Latour. “Sanctions counsel will actively track pending sanctions legislation and are in regular communication with government regulators, and, as a result, are well-positioned to provide immediate, even real-time, advice on sanctions developments. Client alerts, regular status calls, webinars and even informal discussions are just some of the ways that outside counsel help to keep clients informed of real and potential developments in the sanctions environment. Even if a company does not have an identifiable compliance need, engaging regularly with an outside sanctions counsel can help keep a company informed of real and impending sanctions developments and, as a result, minimise the risk of inadvertent violations.”

Companies must devote adequate resources to develop and maintain the right compliance framework. They must be able to move quickly to keep pace with the changing environment and devote the resources required to remain compliant. “Businesses must have robust and comprehensive sanctions policy and procedures, and keep them up to date, adjusting periodically to reflect changes in applicable sanctions regimes and internal structural changes,” says Ms González. “Businesses’ sanctions officers and external counsel need to keep up to speed with the latest developments. There are endless free tools for them to do so, but it requires them regularly checking those tools. With the increased enforcement appetite in the EU, with OFAC broadening its horizons, and an increasingly divergent set of sanctions regimes in the EU and the US and possibly also in the future in the EU and the UK, it seems inevitable that sanctions compliance will become an increasingly complex process. Businesses would be wise to make sanctions a priority in their compliance efforts.”

Sanctions compliance requires organisations to be dynamic and agile, since their obligations can change almost overnight. While internal planning and external counsel are valuable resources, it is becoming harder for companies to stay on the right side of the law. Changing attitudes, particularly in the US, can create additional compliance difficulties. With the Trump administration supposedly reconsidering the recent easing of sanctions against Iran and Cuba introduced by president Obama, organisations must be prepared for all eventualities. Companies should subscribe to the relevant listservs and frequently evaluate internal compliance materials.

Compliance programmes should be tailored to an organisation’s culture. They should consider the products or services the company offers, as well as the jurisdictions in which it operates. Effective policies and procedures should be communicated from senior management and cascaded throughout the organisation. This requires regular and comprehensive educational programmes for employees and third parties. Customers, business partners and other third parties represent a significant compliance risk; as such, companies should conduct robust due diligence, including detailed risk assessments. People, processes and systems must operate in harmony if companies are to remain compliant.

Looking ahead, the evolving state of global sanctions enforcement will require companies to be even more thorough in their approach to third parties, to their business partners and to their employees. Given the fluid nature of global sanctions enforcement, companies must be able to adapt.